Informed-Principal Problem With Moral Hazard, Risk Neutrality, And No Limited Liability

We consider a principal–agent moral-hazard problem with risk-neutral parties and no limited liability in which the principal has private information. The principal's private information creates signaling considerations that may distort the implemented outcome. These distortions can explain, e.g., efficiency wages and muted incentives. We show that in a large class of environments these distortions vanish if the principal is allowed to offer sufficiently rich contracts.